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Hurricane Sandy Could Surpass Andrew as Second-Most Costly Hurricane in Past 20 Years

While there's lingering uncertainty about the magnitude of insured losses from Hurricane Sandy, the storm is poised go down as one of the largest U.S. hurricanes in the past two decades.

The big three catastrophe modelers have estimated Sandy losses ranging from a low of $10 billion to a high of $25 billion, and if it stays close to the higher range, it could be the second-largest hurricane event for the United States in the past 20 years, said Thomas Holzheu, Swiss Re's chief U.S. economist.

Losses from Sandy would likely be dwarfed by Hurricane Katrina, which in 2005 caused roughly $76 billion in insured losses in today's dollars, but would be in the same ballpark as Hurricane Andrew, which caused about $25 billion by that same measure, Holzheu said.

Katrina caused a significant number of business interruption claims, including some in the $500 million to $1 billion range, and exposures from chemical plants, hotels and amusement parks, but Sandy is likely to be a storm that resulted in a very high number of smaller claims, said Clark Schweers, managing director at BDO Consulting and head of the firms business interruption and insurance claims practice.

AIR Worldwide estimates the insured losses at $16 billion to $22 billion. Eqecat has estimated Sandy losses at $10 billion to $20 billion and RMS confirmed it has estimated damages of $20 billion to $25 billion.

Part of the difficulty in narrowing down loss estimates stems from business interruption and contingent business interruption claims, which can take six months to a year to settle, said Schweers.

A major issue facing insurers is whether the storm is considered a hurricane or named storm. Several states Connecticut, Delaware, Maine, Maryland, New York, New Jersey, Pennsylvania, Rhode Island and Washington, D.C. have all ordered insurers not to trigger homeowners' hurricane deductibles, because Sandy wasn't technically a hurricane when it made landfall or the National Weather Service failed to issue hurricane warnings. Hurricane deductibles are typically based on a percentage of the insured property and are usually higher than a standard deductible.

But commercial insurance policies are not as standard as homeowners policies, and the language can vary widely. "The percentage deductible could still apply to commercial policies, for which hurricane deductibles are a "very big deal," Schweers said.

And like Katrina, the issue of whether the damage was covered by wind versus water is likely to be debated, Schweers said.

Some may have been surprised that a storm with "minimal hurricane strength" caused such tremendous losses, but the insurance industry is not surprised to see a hurricane strike the Northeast, said Robert Hartwig, president of the Insurance Information Institute. "This is the type of event the industry plans for, both logistically and financially," Hartwig said.

Primary insurance companies are expected to bear the brunt of the losses, but losses appear to be manageable and likely will result in an earnings event, not a capital event, said A.M. Best Co.

"Even where we stand now, a $25 billion industry loss, compared to the $100 billion in losses in 2011, is not going to be a meaningful event from a capital perspective," Robert DeRose, an A.M. Best vice president and veteran reinsurance analyst, said. "The industry will almost certainly generate an underwriting profit for the year."

"So far there has not been a rating action from A.M. Best totally due to Sandy," A.M. Best Group Vice President John Andre said. Both Andre and DeRose cautioned that insurers that have more concentrated regional exposures could ultimately be affected but that those developments might take time to emerge.

In the wake of Andrew, 13 insurers became insolvent or impaired, according to A.M. Best.

While a handful of companies became insolvent or impaired after the four hurricanes of 2004 (Charley, Frances, Ivan and Jeanne) and Katrina in 2005, 2005 still ranked as a relatively low year for the number of impaired companies.

"Typically, major catastrophes trigger surges in P/C impairments, pushing already vulnerable companies into financial failure," A.M. Best said in 2005. "Such was seen with both hurricanes Hugo and Andrew, which hit three years apart...history does not seem to be repeating this time, thanks to particular financial and underwriting strength seen recently in the industry."

It will take a while for the industry to sort out the losses, Holzheu said. "The impact will not be immediately felt," he said, noting the storm struck too late in the year to impact the January property catastrophe reinsurance renewals.

A good portion of the losses from Sandy are coming from storm surge. "Everyone will be paying more attention to storm surge now," Hartwig said.

American Collectors Insurance said Sandy flooded vintage cars with salt water in New Jersey and New York, making it the largest event the collector car agency has ever seen.

Also, the Boat Owners Association of the United States is estimating more than 65,000 recreational boats were damaged or destroyed by Sandy, causing about $650 million in total damage making it the single largest recorded loss.

Swiss Re said that its Sandy-related losses could top $900 million. A number of other companies have also reported estimated Sandy losses, including Allstate Corp., which estimated its catastrophe losses for October would hit $1.08 billion, with Sandy being the largest of five cat events in that month.

QBE Insurance Group Ltd. estimates losses from Sandy ranging from A$350 million (US$363.4 million) to A$450 million. Progressive Corp. has estimated catastrophe losses of $55 million related to Sandy and was particularly hard hit in New York and New Jersey, according to the company. Kemper Corp. warned its investors it will post in the fourth quarter about $45 million in pretax catastrophe losses related to the storm. Cincinnati Financial Corp.'s property/casualty group estimates Sandy will hit its fourth-quarter results with $25 million to $35 million in pretax cat losses.